The Armageddon Scenario – You lose the house, but still have to pay the mortgage.
This is, in fact, an increasingly familiar scenario in Connecticut and 41 other states wherein homeowners are foreclosed out of their properties, but still have to pay back loan debt that remains unsatisfied by the foreclosure proceeds. This difference between the debt owed and the value received by the bank after the foreclosure is known as a deficiency, and if pursued by the creditor this deficit can be turned into an enforceable judgment. These shortfalls are becoming more and more common everyday. As foreclosures drag, the mortgage balances owed rise and the home values decrease, thereby broadening the gap between the outstanding debt and value received. The result is increasingly large deficiencies, which can often reach six figure amounts.
These deficiency judgments are often valid for twenty years, leaving borrowers with no home and the possibility of huge financial exposure for decades. The Wall Street Journal reports that suits based on deficiency judgments are on the rise, and may in fact explode, as third-party purchasers obtain these judgments for pennies on the dollar and seek to collect the debts from dispossessed homeowners who are attempting to start a new financial life. In fact, the Journal reports that many of those deficiency judgments may be purchased and sold in much the same manner as the original disastrous mortgages themselves.
While some foreclosed homeowners may seek bankruptcy protection for collection of deficiency judgments, many will find themselves ineligible for Chapter 7 relief, thanks to the new more stringent requirements of the Bankruptcy Code, as amended in 2005. Instead of being able to discharge their debts in full under Chapter 7, the new laws will require five-year repayment plans under Chapter 13. This is a devastating, but common result. The key to avoiding any such disaster is to contact a reputable Bankruptcy Attorney for proper preparation under Chapter 7 or Chapter 13 prior to any loss of the property under foreclosure.
To learn more about this pressing problem and how to avoid it…
- Deficiency judgments, representing the difference between the debt owed by a homeowner and the proceeds received by a mortgage holder after a foreclosure, are on the rise as mortgage debts grow and home values decrease.
- Deficiency judgments may be enforceable for up to 20 years, and therefore may haunt a former homeowner long after the property is gone.
- While relief through Chapter 7 bankruptcy may be available for some former homeowners facing deficiencies, the stringent requirements of the “new” Bankruptcy Code may force many foreclosed homeowners to repay deficiency judgments rather than having them discharged.